External Content

This content was published on April 19, 2017 10:01 AMApr 19, 2017 - 10:01

(Bloomberg) -- President Donald Trump’s pick to head the U.S. Food and Drug Administration, Scott Gottlieb, will be in charge of implementing new rules governing the e-cigarette industry after serving for more than a year on the board of a company that sells vaping products.

From March 2015 to May 2016, Gottlieb was a director of Kure Corp., a Charlotte, North Carolina-based firm that distributes e-juices and vaping pens in coffeehouse-style lounges known as vaporiums. He had a financial interest in the company as of March, according to financial and ethics disclosures, and promised to sell his stake if confirmed.

Gottlieb’s stint at Kure may pose a conflict as the FDA decides how vigorously to enforce the new vaping rules, issued in May 2016, that upend the economics of the previously unregulated industry.

“How to regulate e-cigarettes is one of the most critical questions on tobacco regulation that the FDA is going to be facing in the coming years,’’ said Vince Willmore, a spokesman for Washington-based Campaign for Tobacco-Free Kids. “Given his financial interest in an e-cigarette retailer, Dr. Gottlieb clearly has a conflict of interest.’’

Recusal Pledge

Gottlieb promised in his filing, approved by the Office of Government Ethics, that in addition to selling his shares he would recuse himself from any matters concerning Kure for one year from the time he resigned from the board -- a period that expires next month. Willmore said he should go further and abstain from any decision-making involving vaping rules for at least one year from the time he sells his stake in Kure.

“If confirmed, Dr. Gottlieb will undertake the duties of the FDA commissioner impartially and in the best interests of the American people,” Leslie Kiernan, a lawyer at Akin Gump Strauss Hauer & Feld LLP, said on his behalf. “The Office of Government Ethics and the career ethics officials at the Department of Health and Human Services have certified that he is in compliance with all applicable laws and regulations and he will continue to follow those high ethics standards and this administration’s ethics pledge throughout his public service.”

A doctor and former FDA official under George W. Bush, Gottlieb was questioned at an April 5 Senate hearing and is awaiting confirmation. He has spent the past few years in a variety of roles: fellow at the American Enterprise Institute, assistant professor at New York University School of Medicine, adviser to GlaxoSmithKline Plc and a contributor to Forbes. His financial disclosure lists 15 positions as of March.

Gottlieb’s main source of income was from his work as a managing director of T.R. Winston & Co., an investment bank that paid him $1.85 million from the beginning of 2016 to March of this year. The bank raised $4.7 million for Kure in June 2015, according to a press release at the time. Gottlieb, who joined the board that March, attended only one meeting, by telephone, Kure Chief Executive Officer Craig Brewer said in an email.

T.R. Winston, which Gottlieb joined in 2013, specializes in deals involving emerging health-care treatments and energy. It employs 26 brokers and bankers and had $11.9 million of revenue last year. Gottlieb, 44, is one of three managing directors. Most of his work for the firm has involved advising health-care companies, according to CEO G. Tyler Runnels.

In a letter responding to questions about Gottlieb’s work at T.R. Winston, Runnels wrote that Kure “has a longstanding commitment to smoking cessation programs.’’

Candy Flavors

Vaping, which generally delivers nicotine in the form of liquids that are vaporized and inhaled, is considered by many to be less harmful than smoking cigarettes, which deliver other chemicals and carcinogens along with nicotine when lit on fire. But candy flavors and ease of access have made e-cigarettes increasingly popular among teenagers and a gateway for youth to nicotine products. Between 2011 and 2015, e-cigarette use rose to 16 percent of U.S. high school students from 1.5 percent, according to the Centers for Disease Control.

Read more: Big tobacco has caught startup fever

It’s a big business: an $8 billion global market in 2015, according to Euromonitor International. Tobacco giants such as Philip Morris International Inc. are placing big bets on vapor and heat-not-burn products.

Then there’s Kure. The company was incorporated in Florida in 2014. Investors included Charlotte-based private equity firm Siskey Capital, according to the press release issued by Kure and Siskey Capital when fundraising was completed the following year.

Kure vaporiums “raise the bar to ditch dingy head shop vibes and back room mixing,’’ according to the website. “Highly trained Kurators flavor your palate like a barista tends to the perfect brew, guiding you through millions of Juice bar combinations.’’

‘Recreational Activity’

That’s exactly the kind of pitch that upsets Campaign for Tobacco-Free Kids.

“Kure markets e-cigarettes in flavors that could appeal to kids like cotton candy and sugar cookie, and they also present e-cigarettes as a fun recreational activity,’’ Willmore, the group’s spokesman, said. “Those are the kinds of practices that have made e-cigarettes popular among young people, and so the practices of this company are cause for concern.’’

The new FDA regulations extend the agency’s oversight of tobacco products to include vape pens, refillable vaporizers and e-juices, prohibit sales to minors, ban free samples and require warning labels. They also call for makers of products released after February 2007 -- most of those currently sold -- to seek FDA permission to keep them on store shelves.

Approval, the same as for a new tobacco product, can cost between $300,000 and $1 million to obtain, according to Jan Verleur, co-founder and CEO of VMR Products LLC, which owns the largest independent e-cigarette brand in the U.S. That hands advantage to deep-pocketed, traditional tobacco companies such as Philip Morris and Altria Group Inc.

‘Promising Path’

Efforts to soften the new rules are heating up. Tom Cole, a Republican from Oklahoma, and Sanford Bishop, a Georgia Democrat, have introduced a bill in Congress that would get rid of the February 2007 cutoff and grandfather products already on shelves as of 2016. In introducing the legislation, Bishop called vaping products “a promising path for harm reduction for those seeking to quit or limit their smoking.’’

Patty Murray, a Democratic senator from Washington, raised questions at Gottlieb’s hearing about his commitment to addressing the public health risk of kids using flavored nicotine products.

“I’m going to make sure that we appropriately implement the law,’’ Gottlieb replied. He said that while vaping may be less harmful than smoking, and that Congress intended for vaping products to be available, he will not “countenance a rise in adolescent smoking rates.’’

When it comes to flavored products, Gottlieb said “there is a line here somewhere. And I don’t know where that line gets drawn. I think that that line needs to get drawn by people who are expert in evaluating that science and I want to support them.’’

If confirmed, Gottlieb plans to resign from T.R. Winston and divest his interests in companies in which he disclosed stakes, including Kure, according to his ethics agreement.

“We think he is going to be a science-based regulator rather than a fear-based regulator,’’ said Mike Hogan, an industry lobbyist at Alpine Group. “In the long run, we believe that FDA should regulate reduced-risk products in a different way than the No. 1 killer of Americans: cigarettes.’’

Siskey Suicide

Gottlieb’s tenure on the Kure board and his work at T.R. Winston put him in proximity to a recent financial scandal as well.

Richard Siskey, who co-managed Siskey Capital, the private equity firm that backed Kure, committed suicide in December after the FBI fingered him for running a Ponzi scheme on the side. Siskey misused funds from investors in some of his other companies to buy diamond jewelry for his wife, wine and luxury cars, according to an FBI affidavit.

Siskey Capital advised on the Kure share sale led by T.R. Winston in 2015, according to a press release issued by Siskey Capital and Kure. T.R. Winston also raised $8.7 million for Siskey Capital that year and opened a small office in Charlotte on the same floor of the building that housed the private equity firm.

Brewer, Kure’s CEO, said Richard Siskey had no involvement with or investment in the vaping company. Siskey Capital was renamed Stone Street Partners. Its managing member, Marty Sumichrast, who co-managed the private equity firm with Siskey and served as chairman of Kure, didn’t respond to messages seeking comment.

Marty Singer, a Los Angeles lawyer representing Kure, wrote in response to emailed questions that Siskey Capital didn’t invest in the vaping company directly. Rather, he said, shares were owned by a fund that “affiliates of Siskey Capital may have managed.”

Neither T.R. Winston nor any of the companies it raised money for have been implicated in Siskey’s scheme. Runnels, the bank’s CEO, said none of its employees had any knowledge of the alleged scheme and that Gottlieb didn’t work on the Siskey Capital deal.

“Siskey’s alleged wrongdoings relate to a completely separate entity, and there have been no allegations whatsoever that this entirely separate activity had anything to do with T.R. Winston,” Runnels wrote.

To contact the reporters on this story: Zeke Faux in New York at zfaux@bloomberg.net, Dune Lawrence in New York at dlawrence6@bloomberg.net, Jennifer Kaplan in New York at jkaplan84@bloomberg.net.

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net, Robert Blau at rblau1@bloomberg.net, Nick Turner at nturner7@bloomberg.net, Robert Friedman, David Scheer